EXTERNAL ANALYSIS: THE IDENTIFICATION OF

OPPORTUNITIES AND THREATS

CHAPTER 2
LEARNING OBJECTIVES

• Understanding Opportunities and Threats

• Competitive Forces Model

• Strategic Group

• Industry Life Cycle Analysis

• PESTLE

2
 DEFINING AN INDUSTRY
• Industry: Group of companies offering products or services that
are close substitutes for each other

• Sector: Group of closely related industries

• Market segments - Distinct groups of customers within a

market that can be differentiated on the basis of their:
– Individual attributes
– Specific demands

3
THE COMPUTER SECTOR: INDUSTRIES AND
SEGMENTS

4
5
 MARKET SEGMENTS

• Established: Coca-Cola, Pepsi

• Health conscious: Fruit Juices, Sports Drinks

• Premium: Tonic-Water, Canned Smoothies and

Specialty Coffees

2-6
 COMPETITIVE FORCES

Source: Based on How Competitive Forces Shape Strategy, by Michael E. Porter, Harvard Business Review, March/April 1979. 7
RISK OF ENTRY BY POTENTIAL
COMPETITORS
Potential competitors

• Companies that are currently not

competing in the industry but have
the potential to do so

8
BARRIERS TO ENTRY
• Economies of Scale
– Reductions in unit costs attributed to a larger output
• Brand Loyalty
– Preference of consumers for the products of
established companies
• Absolute cost advantage
• Enjoyed by incumbents in an industry and that new
entrants cannot expect to match

9
 BARRIERS TO ENTRY
• Switching costs
• Costs that consumers must bear to switch from the
products offered by one established company to the
products offered by a new entrant
• Government regulations/deregulations
• Falling entry barriers due to government regulation
results in significant new entry, increase in the intensity
of industry competition, and lower industry profit rates

10
RIVALRY AMONG ESTABLISHED COMPANIES

• Competitive struggle between companies within an industry to gain

market share from each other
– Intense rivalry among established companies constitutes a strong threat
to profitability
• among established companies within an industry

11
FACTORS THAT IMPACT THE INTENSITY
OF RIVALRY
1. Industry competitive structure
• number and size distribution of companies in it
• Fragmented/Oligopoly/Monopoly

2. Industry Demand
• Booming vs. Declining

3. Cost conditions
• fixed costs vs. profitability

4. Exit barriers
• High exit barriers - Companies become locked into an unprofitable industry
where overall demand is static or declining

12
EXIT BARRIERS

▪ Economic Dependence
▪ High Fixed Costs
▪ Investments
▪ Emotional Factors
▪ Bankruptcy Regulations

13
 BARGAINING POWER OF BUYERS
Powerful buyers are a threat for companies
▪ When buyers have multiple options to buy from
▪ When buyers purchase in large quantities
▪ Supplier industry is dependent on them for a major portion of sales
▪ With low switching costs and ability to purchase an input from
several companies at once, buyers can pit companies against each
other
▪ Threat of entering the industry and producing the product

14
BARGAINING POWER OF SUPPLIERS

Suppliers’ ability to raise input prices or

industry costs through various means
▪ Product has no substitutes and is vital to the buyer
▪ Not dependent on one particular industry for their sales
▪ Companies would incur high switching costs if they moved to a
different supplier
▪ Threat of entering customers’ industry
▪ Knowledge that companies cannot enter the suppliers’ industry

15
16
SUBSTITUTE PRODUCTS AND
COMPLEMENTORS

• Substitute products - Those of different businesses that satisfy

similar customer needs
– Limit the price that companies in an industry can charge for their product
• Complementors - Companies that sell products that add value to the
other products
– Strong complementors - Provide a increased opportunity for creating
value
– Weak complementors - Slow industry growth and limit profitability

17
STRATEGIC GROUPS WITHIN INDUSTRIES

• Companies in an industry differ in the way they strategically

position products in the market
• Product positioning is determined by the:
– Product quality, distribution channels and market segments served
– Technological leadership and customer service
– Pricing and advertising policy
– Promotions offered

Example: Rolls Royce, Aston Martin, Bentley fall under the same
strategic group.

18
STRATEGIC GROUPS IN THE COMMERCIAL
AEROSPACE INDUSTRY

19
IMPLICATIONS OF STRATEGIC
GROUPS

• Since all companies in a strategic group pursue a similar strategy:

– Customers view them as direct substitutes for each other
– Immediate threat to a company are rivals within its own strategic group
• Different strategic groups have different relationships to each of the
competitive forces

20
STAGES IN THE INDUSTRY LIFE CYCLE

21
 EMBRYONIC INDUSTRY
• Development stage
• Growth is slow owing to:
– Buyer’s unfamiliarity with the product and poor distribution
channels
– High prices due to companies’ inability to reap significant scale
economies
• Barriers to entry are based on access to technological
expertise rather than economies of scale or brand loyalty
• Rivalry is based on
– Creating awareness, setting distribution and designing the
perfect product

22
GROWTH INDUSTRY

• First-time demand expands rapidly due to new customers in the

market
• Prices fall since:
– Scale economies have been attained
– Distribution channels have developed
• Threat from potential competitors is highest at this stage
– Rivalry is low - Companies are able to expand their revenues
without taking market share away from other companies

23
 INDUSTRY SHAKEOUT

• Demand approaches saturation levels

– There are fewer potential first-time buyers

• Rivalry between companies intensifies

• Price war results in bankruptcy of inefficient companies and
deters new entry
• Some companies leave-hence shakeout

24
MATURE INDUSTRIES

• Market is totally saturated, demand is limited to replacement demand,

and growth is low or zero
• Barriers to entry increase and threat of entry from potential
competitors decreases
• Industries consolidate and become oligopolies
• Companies try to avoid price wars

25
DECLINING INDUSTRIES

• Growth becomes negative due to:

– Technological substitution
– Social changes
– Demographics
– International competition
• Rivalry among established companies increases
• Falling demand results in excess capacity

26
THE ROLE OF THE MACRO-ENVIRONMENT

27
MACROECONOMIC
FORCES

Growth rate of
Interest rates
the economy

Currency Inflation or
exchange rates deflation rates

28
GLOBAL FORCES

• Globalization
• Global forces
– Domestic markets
– Foreign enterprises
– Emerging markets

29
TECHNOLOGICAL FORCES
• Technological forces - Technological change can:
– Make products obsolete
– Create a host of new product possibilities
– Impact the height of the barrier to entry and reshape industry structure

30
DEMOGRAPHIC FORCES
• Demographic forces - Outcomes of changes in the characteristics of a
population
• E.g. Rise in elderly population due to increased life expectancy

31
 SOCIAL FORCES
• Social forces - Way in which
changing social morals and values
affect an industry
– More working women

32
POLITICAL FORCES

• Political and legal forces - Outcomes of changes in laws and

regulations

33